The purchase of a home is typically the largest investment that a person makes. Because of the amount of money required to purchase a home, most home buyers do not have sufficient assets to purchase a home outright on a cash basis. In addition, buyers who have already purchased a home may wish to refinance their home. Therefore, potential homebuyers consult lenders such as banks, credit unions, mortgage companies, savings and loan institutions, state and local housing finance agencies, and so on, to obtain the funds necessary to purchase or refinance their homes. These lenders offer mortgage products to potential home buyers. The lenders who make (originate and fund) mortgage loans directly to home buyers comprise the “primary mortgage market.”
When a mortgage is made in the primary mortgage market, the lender can: (i) hold the loan as an investment in its portfolio, or (ii) sell the loan to investors in the “secondary mortgage market” (e.g., pension funds, insurance companies, securities dealers, financial institutions and various other investors) to replenish its supply of funds. The loan may be sold alone, or in packages of other similar loans, for cash or in exchange for mortgage backed securities (MBS) which provide lenders with a liquid asset to hold or sell to the secondary market. By choosing to sell its mortgage loans to the secondary mortgage market for cash, or by selling the mortgage backed securities, lenders get a new supply of funds to make more home mortgage loans, thereby assuring home buyers a continual supply of mortgage credit.
The ability to assess the credit risk associated with a mortgage loan is important to both lenders and investors in the secondary market. A defaulted loan or a delinquent loan is costly to the owner of the asset (initially the lender in the primary mortgage market). Thus, the lender tries to avoid making loans in situations where there is a significant likelihood that the loan will later default or be delinquent. As a lender improves its ability to determine credit risk associated with a loan, the costs associated with lending go down. Fewer loans are given that default or become delinquent. In the secondary mortgage market, where mortgage loans are commonly sold to investors, fewer defaulted/delinquent loans results in a better return on investment, resulting in increased capital flow to the housing market. Better risk predictions, therefore, decrease the defaults/delinquencies, improve capital flow to the housing market, and ultimately decrease mortgage costs for consumers.
Mortgage loans originated by a lender (or alternatively a broker) are typically underwritten prior to closing. Although the final underwriting decision is made by the lender, the lender may submit a loan to an automated underwriting engine of the investor to determine whether the loan meets the credit risk eligibility and loan product eligibility requirements of the investor based on a set of loan information provided by the lender. Such loan information typically includes borrower-specific risk factors, loan-specific risk factors, and property-specific risk factors. Borrower-specific risk factors may include factors such as the borrower's credit rating or score, as well as other factors such as a borrower's income and financial reserves. Property-specific risk factors may include factors such as the type of property (e.g., manufactured housing, etc.). Loan-specific risk factors may include factors such as the loan-to-value ratio, the loan amount, the loan purpose, and so on.
In order to determine whether the loan is eligible for purchase by the investor, underwriting engines typically assess the probability that a borrower will default and the estimated financial loss to the purchaser as the result of the default. For example, in order to determine the probability of default, the underwriting engine may assign different weights to various risk factors or loan characteristics contained in the loan information provided by the lender that are indicative of the potential for default, and then derive the probability of default from the weighted factors. The different weights may be periodically adjusted in order to reflect changes, such as increases or decreases to the impact of particular risk factors or loan characteristics on the probability of default.
While the risk characteristics associated with a loan may often be evaluated in terms of the general risk of default for the loan, the overall risk characteristics associated with the loan may also include other types of risk as indicated by borrower-specific risk factors, loan-specific risk factors, and property-specific risk factors. Such risks and factors may often be specific to the particular investor providing the automated underwriting engine. A need exists for methods and systems for evaluating a loan which evaluate risk characteristics of loans with improved accuracy and which account for risks and costs associated with a loan for a particular investor.
Additionally, other parties, such as mortgage insurers and loan servicers, may wish to utilize the automated underwriting engine provided by an investor to evaluate the risk characteristics associated with a loan with improved accuracy at the time of origination of the loan, but without taking into account the risks and costs specific to the investor. A further need exists for methods and systems for evaluating a loan with improved accuracy at the time of origination.